Thursday, October 30, 2014

Brad DeLong nails it

There are two questions that must be answered in the process of
figuring out whether having the government borrow money and spend is a
good idea:

What is the money being used for?

How expensive is the money to borrow?

Back in the Reagan-Bush I years–the steep run-up in the debt-to-annual GDP ratio in the 1980s and the first third of the 1990s:

The money was used to rapidly build up the U.S. military to counter
the Soviet Union’s overwhelming might–an overwhelming might that existed
only in the fantasies of the neoconservatives who ran the “Team B”
exercise initiated at the CIA by George H.W. Bush.

The money was used for tax cuts for the rich in the hope that
increasingly incentivizing entrepreneurship would accelerate economic
growth above the pace of the 1970s–a vain hope indeed.

The real interest rate at which the U.S. government could borrow was
relatively high–between 3.5%/year and 8.5%/year, and averaging 5.5%/year
in the 1980s.

There’s an obvious policy response to this situation: public investment.
We have huge infrastructure needs, especially in water and
transportation, and the federal government can borrow incredibly
cheaply–in fact, interest rates on [ten-year] inflation-protected bonds
have been negative much of the time (they’re currently just 0.4
percent). So borrowing to build roads, repair sewers and more seems like
a no-brainer. But what has actually happened is the reverse. After
briefly rising after the Obama stimulus went into effect, public
construction spending has plunged. Why?… The federal government could
easily have provided aid to the states…. But once the G.O.P. took
control of the House, any chance of more money for infrastructure
vanished

And after summarizing the fiscal failures of Bush ll, DeLong concludes:

Now, of course, things look different.......The fruit as to what the government could do that would be useful,
productive, and growth-enhancing is not just low-hanging. It is lying on
the ground.
And yet it is impossible to get the chattering class in Washington to seriously ask the two questions:

How valuable would be the things we would be using the money for?

How expensive would the money be to borrow?

and reach the natural, obvious, inescapable conclusion that right now
what the U.S. needs is not a smaller but a larger national debt.
Instead, all we hear is: